As widely expected, the Monetary Policy Committee (MPC) of the Bank of England today decided to keep the policy rate unchanged at 0.5 percent. As in March, the decision was seven to two. The QE programme was also left unchanged, and this decision was unanimous. Despite the minority still wanting to hike the bank rate, the MPC struck a less hawkish tone today than in February. In February the MPC said that if the economy developed broadly in line with expectations, "monetary policy would need to be tightened somewhat earlier and by a somewhat greater extent over the forecast period than previously expected." Today the MPC just said that should the economy develop broadly in line with expectations, an ongoing tightening of monetary policy over the forecast period would be appropriate.

Forecasts were revised slightly lower

According to the MPC, the outlook for inflation and activity was broadly unchanged since the February report. Near-term softness was expected to be temporary. However, the MPC also said that there was particular uncertainty around the near-term outlook given the weakness in Q1, both in the UK and abroad. Therefore, the MPC saw the risks around the projection as balanced now, rather than skewed to the upside as in February. Due to a weaker-than-expected outcome in Q1, the GDP estimate for 2018 was lowered to 1.4 percent from 1.8 percent. The forecast for 2019-20 was unchanged at 1.7 percent. Regarding the labour market, the MPC said that wage growth and domestic cost pressures were firming gradually and broadly as expected. The MPC continued to judge that the UK economy had a very limited degree of slack. The forecast for the unemployment rate was lowered slightly to 4.1 percent for 2018 and 4.0 percent in 2019-20. The forecast for CPI inflation was also lowered for the whole forecasting period. The MPC now expects CPI inflation to decelerate to 2.1 percent by Q3 2019, which is around one year earlier than in February. By Q3 2020, the MPC now expects CPI inflation to fall to 2.0 percent and stay there.

We no longer expect two hikes from the Bank of England this year

To sum up, the message from the Bank of England today was less hawkish than in February, in our view. The conditioning path for the Bank of England forecast implies that the bank rate will be hiked two to three times by the end of Q1 2021. Up until now, we have expected the Bank of England to hike the policy rate twice this year. However, given today’s less hawkish message from the Monetary Policy Committee and the somewhat softer outlook, we will revise our forecast to just one rate hike this year. We will formally update our forecasts for GBP and the policy rate next week.